What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-25 · 206 added, 232 removed, 653 unchanged (40% of the section changed)

11 unchanged sentences

The Company’s results of operations are also affected by prevailing economic conditions, competition, government policies and other actions of regulatory agencies.

The Company’s financial condition, operating results and liquidity in 2020 and 2021 were impacted by COVID-19 and the monetary and fiscal policy changes enacted to address the pandemic.

Starting in 2020, the Federal Reserve reduced interest rates and reserve requirements, while also increasing quantitative easing through purchases of Treasuries and agency mortgage-backed securities.

The federal government’s fiscal support of the economy through the Cares Act, the ARA and other acts have been highly expansionary.

Low interest rates, supply chain disruptions and monetary and fiscal policies contributed to higher inflation in 2021, leading the Federal Reserve to begin tapering its quantitative easing in November 2021.

The following table summarizes the significant components of the First Choice and Seacoast transactions at the date of acquisition.

Note 2 – Acquisitions” for more information.

First Choice Seacoast

($ in thousands) July 21, 2021 November 12, 2020

Loans, net $ 1,936,137 $ 1,190,441

Securities 34,489 —

Total assets acquired 2,248,062 1,312,037

Deposits 1,840,429 1,081,006

Total liabilities assumed 2,006,857 1,193,595

Consideration paid:

Cash $ 2,152 $ 1,630

Common stock 1

343,650 167,035

Total consideration paid $ 345,802 $ 168,665

1 Common stock consideration for First Choice was $342,280, net of $1,370 for shares withheld on the settlement of share-based awards of First Choice employees.

The Company’s financial condition, operating results and liquidity in 2022 were impacted by the monetary policy actions enacted to address rising inflation.

In 2022, the Federal Reserve increased interest rates seven times for a total increase of 425 basis points to the Federal Funds Target Interest Rate during the year, while also changing its accommodative monetary policy through a reduction of Treasuries and agency mortgage-backed securities held on its balance sheet.

This follows a period of highly expansionary fiscal support from the federal government during the start of the COVID-19 pandemic in 2020-2021.

Financial Performance Highlights

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Net interest income 473,903 360,194 270,001

Provision for credit losses 13,385 65,398 6,372

Net interest income after provision for loan losses 346,809 204,603 232,345

Provision (benefit) for credit losses (611) 13,385 65,398

Net interest income after provision (benefit) for credit losses 474,514 346,809 204,603

Total noninterest income 59,162 67,743 54,503

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Net income $ 203,043 $ 133,055 $ 74,384

Preferred dividends 4,041 — —

Net income available to common shareholders $ 199,002 $ 133,055 $ 74,384

Basic earnings per share $ 5.32 $ 3.86 $ 2.76

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Classified assets 99,122 100,797 123,808

Classified assets to total assets 0.76 % 0.74 % 1.27 %

Nonperforming loans to total loans 0.10 % 0.31 % 0.53 %

Nonperforming assets to total assets 0.08 % 0.23 % 0.45 %

Allowance for loan losses to total loans 1.61 % 1.89 % 0.81 %

Allowance for credit losses to total loans 1.41 % 1.61 % 1.89 %

Net charge-offs to average loans 0.04 % 0.14 % 0.03 %

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• The Company reported net income of $203.0 million, or $5.31 per diluted share for 2022, compared to $133.1 million, or $3.86 per diluted share for 2021.

In addition to organic growth, contributing to the

increase in net income was a full year of Seacoast operations and a partial year of First Choice operations.

Net income also benefited from a reduction in the provision for credit losses of $52.0 million in 2021 compared to 2020, which was partially offset by a $17.9 million increase in merger-related expenses.

Acquisition related provision for credit losses of $25.4 million and $8.6 million in 2021 and 2020, respectively, were included in the provision for credit losses.

In addition to organic growth, contributing to the increase in net income was a full year of First Choice operations and an increase in market interest rates.

Net income in 2022 also benefited from a reduction in the provision for credit losses of $14.0 million and a $25.5 million reduction in merger-related and branch-closure expenses, compared to 2021.

Acquisition related provision for credit losses of $25.4 million were included in the provision for credit losses in 2021.

This expense, commonly referred to as the “CECL double-count”, is recognized when a loan portfolio is acquired.

Excluding the CECL double-count, the provision for credit losses decreased in 2021 primarily due to strong credit quality, the forward-looking CECL methodology and the improved outlook for forecasted economic factors compared to 2020.

Excluding the CECL double-count, the benefit for credit losses decreased in 2022 primarily due to loan growth and the forward-looking CECL methodology and the worsening outlook for forecasted economic factors compared to 2021.

• Preferred stock dividends of $4.0 million were declared and paid on the Series A Preferred Stock.

• Net interest income for 2022 totaled $473.9 million , an increase of $113.7 million, or 32%, compared to $360.2 million for 2021.

PPP interest and fee income totaled $27.3 million and $19.6 million in 2021 and 2020, respectively.

The First Choice acquisition added $37.9 million and the Company benefited from a full year of Seacoast operations in 2021 compared to a partial year in 2020.

Organic growth in the loan portfolio also contributed to the current year increase in net interest income.

• Net interest margin decreased 15 basis points to 3.41% during 2021, compared to 3.56% in 2020.

The decrease was primarily due to an increase in liquidity from deposit growth.

Average interest-bearing cash accounts of $1.1 billion had a yield of 0.14% in 2021, compared to $228.8 million at a yield of 0.27% in 2020.

• Noninterest income increased $13.2 million, or 24%, to $67.7 million in 2021 compared to $54.5 million in 2020.

This improvement was primarily due to organic growth and the acquisitions of Seacoast and First Choice.

Organic loan growth, higher average loan balances from the First Choice acquisition, and an increase in market interest rates increased net interest income.

These increases were partially offset by a decline in PPP interest and fee income as the program wound down.

PPP income totaled $5.0 million and $27.3 million in 2022 and 2021, respectively.

• The net interest margin increased 48 basis points to 3.89% during 2022, compared to 3.41% in 2021.

The increase was primarily due to the 4.97% loan yield in 2022, which increased 64 basis points, from 4.33% in 2021.

• Noninterest income decreased $8.5 million, or 13%, to $59.2 million in 2022 compared to $67.7 million in 2021.

While the increase in interest rates benefited net interest income, higher interest rates resulted in lower mortgage banking and tax credit income.

The Company also became subject to the Durbin Amendment limitation on interchange income in 2022, which reduced card services revenue by approximately $2.0 million.

• Noninterest expenses totaled $274.2 million for 2022, an increase of $28.3 million, or 12%, compared to 2021.

Seacoast and First Choice increased noninterest expense $51.2 million in 2021 compared to 2020, in addition to a $17.9 million increase in merger-related expenses year-over-year.

The Company’s efficiency ratio was 57.5% in 2021, compared to 51.5% for the prior year.

The increase in 2021 was primarily due to merger-related expenses.

The Company’s core efficiency ratio 1 was relatively stable at 51.6% in 2021, compared to 51.0% for the prior year.

A full year of First Choice expenses, higher compensation from merit increases and an expanded associate base, and higher deposit servicing costs were the primary drivers of the increase in noninterest expense.

Offsetting these increases were declines in nonrecurring expenses of $22.1 million in merger expenses and $3.4 million in branch-closure expenses recognized in 2021.

The Company’s core efficiency ratio 1 was stable at 49.8% in 2022, compared to 49.7% for the prior year.

• The Company’s effective tax rate was 21.7% in 2022 compared to 21.1% in 2021.

The higher rate in 2021 primarily resulted from higher pre-tax income and the Company’s expanded geographic footprint and the related state apportionment.

1 Non-GAAP measures.

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During 2022, we announced the following significant transactions:

• The Company repurchased 700,473 of its common shares at a weighted-average share price of $47.00.

• Dividends paid in 2022 of $0.90 per share increased $0.15 per share, or 20%, compared to $0.75 per share in 2021.

• Retired 1,980,093 shares of treasury stock.

2021 Significant Transactions

During 2021, we announced the following significant transactions:

• On July 21, 2021, the Company announced the completion of its acquisition of First Choice, a commercial bank based in Los Angeles, CA, with $2.3 billion in assets.

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A lease and fixed asset impairment charge of $3.8 million was recognized, including $0.4 million reported in merger-related expenses.

The Company expects to realize annual cost savings of approximately $2.3 million related to these closures.

• The Company redeemed $50.0 million of 4.75% fixed-to-floating rate subordinated notes.

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• The Company repurchased 1,299,527 of its common shares at a weighted-average share price of $46.62.

At December 31, 2021, there were 700,473 shares remaining to be purchased under the existing share repurchase plan.

• Dividends paid in 2021 of $0.75 per share increased $0.03 per share, or 4%, compared to $0.72 per share in 2020.

2020 Significant Transactions

During 2020, we announced the following significant transactions:

• On November 12, 2020, the Company announced the completion of its acquisition of Seacoast which operated five full-service retail and commercial banking offices in California and Nevada as well as SBA loan production offices and deposit production offices in various states.

Aggregate consideration at closing was 5.0 million shares of Company common stock to Seacoast shareholders.

The overall transaction had a value of $169 million.

• Assisted new and existing customers with navigating and accessing PPP loans through the approval of approximately 3,900 loans totaling $859 million.

• In May 2020, the Company issued $63.3 million of 5.75% fixed-to-floating rate subordinated notes due in 2030.

The notes are callable beginning in 2025 and are included in tier 2 capital.

• The Company repurchased 456,251 of its common shares at a weighted-average share price of $33.64.

• Dividends paid in 2020 of $0.72 per share increased $0.10 per share, or 16%, compared to $0.62 per share in 2019.

RESULTS OF OPERATIONS

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Loan fees in 2022 and 2021 included PPP fees of $4.1 million and $21.7 million, respectively.

2 Non-taxable income is presented on a fully tax-equivalent basis using a 25.2% tax rate in 2021 and a 24.7% tax rate in each of 2020 and 2019.

2 Non-taxable income is presented on a fully tax-equivalent basis using a 25.2% tax rate in each of 2022 and 2021 and a 24.7% tax rate in 2020.

The tax-equivalent adjustments were $7.0 million for the year ended December 31, 2022, $5.1 million for the year ended December 31, 2021, and $3.2 million for the year ended December 31, 2020.

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Net interest income (on a tax equivalent basis) was $480.9 million for 2022, compared to $365.3 million for 2021, an increase of $115.6 million, or 32%.

Total interest income increased $80.4 million and total interest expense decreased $11.7 million.

The increase in net interest income in 2021 was primarily due to higher loan volumes, which benefited from the Seacoast and First Choice acquisitions, PPP loans, and a decline in the interest rate on interest-bearing liabilities.

Total interest income increased $133.7 million and total interest expense increased $18.1 million.

The increase in net interest income in 2022 was primarily due to a higher average yield on interest earning assets and higher loan volumes that benefited from the First Choice acquisition.

These increases were offset by a decline in PPP loan income and an increase in the average cost paid on interest bearing liabilities.

Loans issued through the PPP bear interest at 1% and have either a two or five year maturity.

As a PPP lender, the Company also receives fees for the issuance of PPP loans that vary based on the size of the loan.

The Company also received fees for the issuance of PPP loans that varied based on the size of the loan.

Interest income and loan fees included in net interest income from the PPP program totaled $5.0 million and $27.3 million in 2022 and 2021, respectively.

During 2021, the Company received $14.6 million in PPP loan fees for loans originated in the year.

These fees are recognized over the life of the loan, or when the loan is repaid or forgiven.

At December 31, 2021, the Company has $272.0 million in PPP loans and $4.2 million in deferred fees, compared to $698.6 million in loans and $11.3 million in fees at the end of 2020.

At December 31, 2022, the Company had $7.3 million in PPP loans and $0.1 million in deferred fees, compared to $272.0 million in loans and $4.2 million in fees at the end of 2021.

The tax-equivalent net interest margin was 3.89% for 2022, compared to 3.41% for 2021.

The primary driver of the decline in net interest margin from 2020 to 2021 was an increase in liquidity from deposit growth.

Average interest-bearing cash balances grew to $1.1 billion, an increase of $856.1 million from 2020.

In addition, 2021 was impacted by a full year of low interest rates following the Federal Reserve’s reduction of interest rates in 2020.

The federal funds target rate declined 150 basis points in 2020 and one-month LIBOR declined over 160 basis points.

decline in short-term rates reduced the yield on the Company’s variable-rate loan portfolio, as well as the yield earned on new loan production.

The primary driver of the increase in net interest margin from 2021 to 2022 was an increase market interest rates.

In 2022, the Federal Reserve significantly increased interest rates for the first time since 2018.

The federal funds target rate increased 425 basis points in 2022.

The increase in short-term rates increased the yield on the Company’s variable-rate loan portfolio, as well as the yield earned on new loan production.

As of December 31, 2022, variable-rate loans comprised approximately 63% of total loans.

In response to the decline in interest rates, the Company proactively reduced the cost of certain managed money market and interest-bearing accounts, while also reducing certificates of deposit balances and wholesale borrowings.

The increase in market interest rates also increased the cost on interest bearing liabilities, although at a slower rate than the increase on the earning asset yield.

The earning asset yield

increased 59 basis points to 4.22% in 2022, compared to 3.63% in 2021.

Comparatively, the cost of interest bearing liabilities increased 24 basis points to 0.60%, from 0.36% in 2021.

Average interest-earning assets increased $1.7 billion, or 15%, to $12.4 billion for the year ended December 31, 2022.

The increase was due to growth in average earning assets due to the inclusion of a full year of Seacoast operations, a partial year of First Choice operations and the previously mentioned increase in liquidity from deposit generation.

The increase was due to growth in average earning assets due to the inclusion of a full year of First Choice operations, organic growth in the loan portfolio and a deployment of excess liquidity into the investment portfolio.

Average securities represented 17% of earnings assets in 2022 and 15% in 2021.

The acquisitions of Seacoast and First Choice did not include any significant investment security balances.

The Company has taken a measured approach to investing excess liquidity into the investment portfolio, increasing the average balance from $1.4 billion in 2020 to $1.6 billion in 2021.

Average interest-earning deposits increased from 3% to 10% of earning assets, primarily due to higher liquidity from deposit growth.

Volume growth of the balance sheet drove an increase in interest income on earning assets of $93.8 million.

Interest income on interest-earnings assets decreased $13.3 million primarily due the decline in interest rates in 2021 compared to 2020.

Average interest-bearing liabilities increased $1.1 billion, or 20% for the year ended December 31, 2021.

The increase resulted from $1.2 billion of growth in interest-bearing deposits.

While average interest-bearing liabilities increased, interest expense declined $11.7 million due to a 26 basis point decline in the cost of deposits, primarily due to the run-off of higher yielding certificates of deposit.

The Company issued $63.3 million of subordinated debentures in May 2020 with an interest rate of 5.75% that was included for a full year in 2021.

Partially offsetting this additional expense was the redemption of the $50.0 million subordinated debentures at 4.75% in the fourth quarter 2021.

The total cost of interest-bearing liabilities declined 28 basis points, from 0.64% in 2021 to 0.36% in 2021.

The shift in the mix of interest-bearing liabilities from certificates of deposit and wholesale borrowings to interest-bearing and noninterest-bearing deposits reduced interest expense in 2021 by $0.4 million.

Interest expense on interest-bearing liabilities decreased $11.3 million for the year ended December 31, 2021 due to lower rates.

Average interest-earning deposits decreased from 10% to 9% of earning assets, due to the increase in securities.

Volume growth of the balance sheet drove an increase in interest income on earning assets of $65.8 million, while the increase in interest rates drove interest income on interest-earnings assets up by $67.9 million in 2022 compared to 2021.

Average interest-bearing liabilities increased $426.9 million, or 7% for the year ended December 31, 2022.

The increase resulted from $512.4 million of growth in interest-bearing deposits, primarily in money market and interest bearing demand deposit accounts due to organic growth and the First Choice acquisition.

Average debt and wholesale borrowings declined $85.5 million in 2022 from 2021, due to the redemption of $50.0 million in subordinated debentures at 4.75% in the fourth quarter 2021 and a decreased need for wholesale borrowings due to the growth in average deposits.

The total cost of interest-bearing liabilities increased 24 basis points, from 0.36% in 2021 to 0.60% in 2022.

The shift in the mix of interest-bearing liabilities reduced interest expense in 2022 by $2.2 million, while the increase in the average cost of interest bearing liabilities increased interest expense $20.4 million in 2022.

Noninterest Income

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Total noninterest income $ 59,162 $ 67,743 $ 54,503 $ (8,581) $ 13,240

Noninterest income increased $13.2 million, or 24%, in 2021 compared to 2020.

This improvement was primarily due to a $5.4 million increase from Seacoast and First Choice, a $3.6 million increase in other income, primarily private equity and community development investments, a $2.4 million increase in card services income, and a $1.4 million increase in tax credit activity.

Noninterest income decreased $8.6 million, or 13%, in 2022 compared to 2021.

This decrease was primarily due to a $5.5 million decrease in tax credit income and a $5.4 million decrease in miscellaneous income.

Rising interest rates reduced tax credit income due to the impact on tax credit projects carried at fair value.

The rise in interest rates increased the discount rate used in the fair value of these projects, resulting in a lower fair value.

The $5.4 million decline in miscellaneous income was primarily due to a $2.6 million decrease in mortgage banking income and a $2.6 million decrease in private equity distributions.

The rise in market interest rates in 2022 reduced demand for 1-4 family mortgages, which led to the decline in mortgage banking income.

Private equity distributions are not a consistent source of income and fluctuates based on distributions from the underlying funds.

Included within miscellaneous income was a $1.0 million increase in swap fee income in 2022 from customer hedging transactions, that was offset by a $1.0 million decrease in gains on the sale of other real estate.

Card services revenue declined $0.3 million in 2022.

Included in this decrease was a decline of $2.1 million in debit card interchange income, partially offset by a $1.8 million increase in credit card fees.

The Durbin Amendment limits the amount of interchange income banks can earn on debit card transactions after total assets exceed $10 billion.

This limitation went into effect for the Company at the beginning of the third quarter of 2022 and was the primary driver of the reduction in debit card revenue.

The decreases in noninterest income described above were partially offset by a $2.9 million increase in service charges on deposit accounts.

This increase was due to deposit growth and the number of accounts using the Company’s treasury management products and was also partially attributed to a full year of First Choice deposit service revenue.

Noninterest Expense

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Merger-related expenses — 22,082 4,174 (22,082) 17,908

Deposit costs 31,082 14,211 1,246 16,871 12,965

Other expenses 57,873 48,464 43,004 9,409 5,460

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Noninterest expense increased $28.3 million, or 12%, in 2022 compared to 2021.

The acquisitions of Seacoast and First Choice added $57.2 million of operating expenses in 2021, compared to $6.0 million from Seacoast in 2020.

Excluding First Choice and Seacoast, employee compensation and benefits increased $7.0 million in 2021 compared to 2020, or 8%.

The primary components of the increase in compensation and benefits were $2.7 million in salaries from merit increases and net new positions, $1.3 million in employee benefits, and $1.2 million in equity-based compensation.

The Company announced in the third quarter of 2021 the closure of two branch locations in St.

Louis and recognized a lease and fixed asset impairment charge of $3.4 million.

The branch closures became effective in January 2022.

Merger related expenses of $22.1 million on the First Choice and Seacoast acquisitions, including the cost of closing three California locations, were $17.9 million higher than the $4.2 million recorded in 2020 on the Seacoast acquisition.

The Company expects to realize annual cost savings of approximately $2.3 million related to these closures.

The Company did not earn a full year of operating income, or incur a full year of expense, from First Choice in 2021, but will do so in 2022.

The Company does not expect to incur any additional merger expenses on First Choice or Seacoast.

The increase was attributed primarily to a $22.1 million increase in compensation and benefits, a $16.9 million increase in deposit costs and a $9.4 million increase in other expenses.

The increase in compensation and benefits was due to annual merit increases and an increase in full time equivalent employees, higher share-based compensation from higher award levels and higher performance based vesting due to the Company’s financial performance, and a full year of First Choice operations.

First Choice operations added $11.2 million in additional noninterest expense in 2022 over 2021.

For certain deposit accounts in the Company’s specialized deposit portfolio, clients receive an earnings credit rate on average collected balances that may be used to offset expenses associated with the client’s activities for managing the accounts.

These expenses are reflected in noninterest expense.

The increase in deposit costs in 2022 is due to organic growth in specialized deposits and an increase in market interest rates that impacts competitive conditions that those clients can garner in the market.

The increase in other expense of $9.4 million was attributed primarily to a $3.1 million increase in business development, a $2.0 million increase in the amortization of tax credit investments, a $1.4 million increase in SBA repair and denial reserves, a $1.0 million increase in credit/debit card transaction processing expenses, and a $1.0 million increase in FDIC assessment insurance.

The increase in business development is primarily due to increased activity as the economy has reopened since the start of the COVID-19 pandemic.

The increase in amortization of tax credit investments is primarily due to new investments in new market tax credits that are amortized in noninterest expense, while the tax benefit is recognized in tax expense.

The increase in credit/debit card transaction processing is due to higher volumes of activity and the increase in FDIC assessment insurance is due to the increase in the overall balance sheet of the Company.

Partially offsetting the increases described above were decreases of $22.1 million in merger related expenses on the First Choice acquisition and a $3.4 million decrease in branch-closure expenses from a branch rationalization project that was finalized in 2021.

The Company expects to continue to invest in its associates and other infrastructure that supports growth.

In addition, low unemployment, inflationary pressures and a shift in employee work arrangements to a virtual/hybrid model are expected to impact future operating expenses.

The Company’s blended federal and state tax rate is approximately 25.2% at the end of 2021, compared to 24.9% at the end of 2020.

Permanent differences between pre-tax income and taxable income along with tax planning initiatives reduced the effective income tax rate in 2021 to 21.1% compared to 19.1% in 2020.

The increase in the effective tax rate in 2021 was primarily due to higher pretax income in 2021 and an increase in state taxable income due to the Company’s expanded geographic footprint.

Additionally, in 2020, the Company was able to carryback a net operating loss to a prior period with a higher tax rate, reducing the effective tax for that year.

In addition, low unemployment, inflationary pressures and a shift in employee work arrangements to a virtual/hybrid model are expected to continue to have an impact on future operating expenses.

The Company’s blended federal and state tax rate was approximately 25.2% at the end of both 2022 and 2021.

The effective tax rate, which is adjusted for permanent differences, such as tax exempt income, was 21.7% in 2022 compared to 21.1% in 2021.

The increase was primarily due to higher pretax income in 2022 and an increase in state taxable income due to the Company’s expanded geographic footprint.

Note 16 – Income Taxes” for additional information.

FINANCIAL CONDITION

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The ability of the Company’s borrowers to honor their contractual obligations is partially dependent upon the local economy and its effect on the real estate market.

The following table sets forth the composition of the Company’s loan portfolio by type of loans:

The following table sets forth the composition of the loan portfolio by type of loans:

($ in thousands) 2022 2021

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The Company continues to focus on originating high-quality C&I relationships as they typically have variable interest rates and allow for cross selling opportunities involving other banking products.

C&I loan growth also

supports our efforts to maintain the Company’s asset-sensitive interest rate risk position.

Additionally, our specialized products, especially sponsor finance, life insurance premium financing, and tax credit financing/lending, consist of primarily C&I loans, and have contributed significantly to the Company’s C&I loan growth.

These loans are sourced through relationships developed with wealth and estate planning firms and private equity funds and are not bound geographically by our markets.

C&I loan growth also supports our efforts to maintain the Company’s asset-sensitive interest rate risk position.

Additionally, our specialized products, especially sponsor finance, life insurance premium financing, and tax credit lending, consist of primarily C&I loans, and have contributed significantly to the Company’s C&I loan growth.

These loans are sourced through relationships developed with wealth and estate planning firms, private equity funds and tax credit specialists and are not bound geographically by our markets.

As a result, these specialized loan products offer opportunities to expand and diversify our overall geographic concentration by entering into new markets.

Real estate loans place an emphasis on the estimated cash flows from the operation of the property and/or the underlying collateral value.

• Our commercial real estate loans, including investor-owned and owner-occupied categories, primarily represent multifamily and other commercial property loans on which the primary source of repayment is income from the property.

• Our commercial real estate loans, including investor-owned and owner-occupied categories, primarily represent commercial property loans on which the primary source of repayment is income from the property.

These loans are principally underwritten based on the cash flow coverage of the property, the Company’s loan to value guidelines, and generally require either the limited or full guaranty of principal sponsors of the credit.

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At December 31, 2022, $351.9 million of these loans include the use of interest reserves and follow standard underwriting guidelines.

Construction projects are monitored by the loan officer and a centralized independent loan disbursement function is employed.

• Residential real estate loans include residential mortgages, which are loans that, due to size or other attributes, do not qualify for conventional home mortgages available-for-sale in the secondary market, second mortgages and home equity lines.

Construction projects are monitored by the loan officer and a centralized independent loan disbursement function.

Residential mortgage loans are usually limited to a maximum of 80% of collateral value at origination.

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Credit risk is managed by thoroughly reviewing the creditworthiness of the borrowers prior to origination and thereafter.

The following table presents a breakdown of loans by NAICS code at December 31, 2021 and 2020:

December 31, 2021 December 31, 2020

The following table presents a breakdown of loans by NAICS code at the periods indicated:

($ in thousands) Outstanding Balance % Outstanding Balance %

Accomodation and Food Services $ 785,485 9 % $ 577,026 8 %

Accommodation and Food Services $ 880,870 9 % $ 785,485 9 %

Administrative and Support and Waste Management and Remediation Services 200,586 2 % 176,601 2 %

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Total Loans $ 9,737,138 100 % $ 9,017,642 100 %

1 Includes $95.5 million in animal production and $92.1 million in crop production at December 31, 2021.

The following table presents a breakdown of commercial & industrial loans by size at December 31, 2021.

($ in thousands) Number of Loans Outstanding Balance Average Balance

1 Includes $94.0 million and $95.5 million in animal production at December 31, 2022, and 2021, respectively and $95.6 million and $92.1 million in crop production at December 31, 2022, and 2021, respectively.

The following table presents a breakdown of commercial & industrial loans by size at the periods indicated:

($ in thousands) Number of Loans Outstanding Balance Average Balance Number of Loans Outstanding Balance Average Balance

<$2 million 2,116 $ 771,717 $ 365 3,326 $ 921,537 $ 277

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Total 2,630 $ 3,859,882 $ 1,468 3,767 $ 3,392,375 $ 901

The following table presents a breakdown of commercial real estate loans by size at December 31, 2021.

($ in thousands) Number of Loans Outstanding Balance Average Balance

The following table presents a breakdown of commercial real estate loans by size at the periods indicated:

($ in thousands) Number of Loans Outstanding Balance Average Balance Number of Loans Outstanding Balance Average Balance

<$2 million 3,170 $ 1,872,671 $ 591 3,300 $ 1,840,760 $ 558

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Total 3,741 $ 4,628,371 $ 1,237 3,807 $ 4,176,928 $ 1,097

The following table presents a breakdown of construction loans by size at December 31, 2021.

($ in thousands) Number of Loans Outstanding Balance Average Balance

The following table presents a breakdown of construction loans by size at the periods indicated:

($ in thousands) Number of Loans Outstanding Balance Average Balance Number of Loans Outstanding Balance Average Balance

<$2 million 408 $ 181,813 $ 446 539 $ 212,129 $ 394

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Total 487 $ 611,565 $ 1,256 640 $ 734,073 $ 1,147

The following table presents a breakdown of residential loans by size at December 31, 2021.

($ in thousands) Number of Loans Outstanding Balance Average Balance

The following table presents a breakdown of residential loans by size at the periods indicated:

($ in thousands) Number of Loans Outstanding Balance Average Balance Number of Loans Outstanding Balance Average Balance

<$2 million 2,252 $ 293,691 $ 130 2,457 $ 304,224 $ 124

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Total 2,277 $ 395,537 $ 174 2,493 $ 454,052 $ 182

The following table presents a breakdown of other loans by size at December 31, 2021.

($ in thousands) Number of Loans Outstanding Balance Average Balance

The following table presents a breakdown of other loans by size at the periods indicated:

($ in thousands) Number of Loans Outstanding Balance Average Balance Number of Loans Outstanding Balance Average Balance

<$2 million 1,265 $ 125,136 $ 99 1,415 $ 154,663 $ 109

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Total 1,289 $ 241,783 $ 188 1,440 $ 260,214 $ 181

The following table presents a breakdown of total loans by geographic region at December 31, 2021:

($ in thousands) December 31, 2021

Louis $ 2,153,749

Kansas City 785,342

Arizona 545,362

New Mexico 538,981

California 1,715,978

The following table presents a breakdown of total loans by geographic region at the periods indicated:

(in thousands) 2022 2021

Midwest $ 3,214,305 $ 2,939,092

Southwest 1,242,125 1,084,343

West 1,654,899 1,656,511

Specialty, PPP and Other loans 3,625,809 3,337,696

Total $ 9,737,138 $ 9,017,642

The following table illustrates selected specialty lending detail, at December 31, 2021 and 2020:

December 31, First Choice Acquired Loans

($ in thousands) 2021 2020 Change % Change at 12/31/21

Loan guarantees, primarily on SBA 7(a) loans, totaled $960.3 million and $1.2 billion at December 31, 2022 and 2021, respectively.

The following table provides additional information on select specialty lending detail, at the periods indicated:

($ in thousands) 2022 2021 Change % Change

C&I $ 1,904,654 $ 1,478,689 $ 425,965 28.8 %

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Sponsor finance 635,061 508,469 126,592 24.9 %

Life insurance premium financing 593,562 534,092 59,470 11.1 % —

Life insurance premium finance 817,115 653,028 164,087 25.1 %

Tax credits 559,605 486,881 72,724 14.9 %

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It includes mid-market company mergers and acquisitions, targeted private equity firms, principally SBICs, and senior debt financing to portfolio companies.

The life insurance premium financing category specializes in financing whole life insurance premiums utilized in high net worth estate planning, through relationships with boutique estate planners throughout the United States.

The life insurance premium finance category specializes in financing whole life insurance premiums utilized in high net worth estate planning, through relationships with boutique estate planners throughout the United States.

The tax credit portfolio includes tax credit-related lending on affordable housing projects funded through the use of

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In addition, we provide leveraged and other loans on projects funded through the CDFI New Markets Tax Credit Program.

This portfolio also includes tax credit brokerage through 10-year streams of Missouri state tax credits from affordable housing development funds.

This portfolio also includes tax credit brokerage through 10-year streams of state tax credits from affordable housing development funds.

The tax credits are sold to clients and other individuals for tax planning purposes.

SBA 7(a) loans are primarily owner-occupied, commercial real estate loans secured by a 1st lien.

SBA loans are originated under the SBA 7(a) program and are primarily owner-occupied, commercial real estate loans secured by a 1st lien.

These loans predominantly have a 75% portion guaranteed by the SBA.

SBA PPP loans originated in 2020 in response to the COVID-19 pandemic and are guaranteed by the SBA.

SBA PPP loans originated in response to the COVID-19 pandemic and are guaranteed by the SBA.

The loans may be forgivable by the SBA if certain requirements are met.

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(1) Includes loans with no stated maturity and overdraft lines of credit.

The majority of variable loans are based on the prime rate or LIBOR.

The majority of variable loans are based on the prime rate, LIBOR, or SOFR.

At December 31, 2022, $3.7 billion or 60% of variable rate loans were subject to an interest rate floor.

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Provision and Allowance for Credit Losses

The adoption of CECL on January 1, 2020 increased the ACL on loans by $28.4 million, or 65%, and the allowance for unfunded commitments by $2.4 million as compared to 2019.

These increases were offset in retained earnings and did not impact the consolidated statement of operations.

The following table presents the components of the provision for credit losses for the periods indicated:

(in thousands) 2022 2021

Benefit for loan losses $ (4,210) $ (10,911)

Provision on acquired loans — 23,904

Provision for off-balance sheet commitments 1

Provision for held-to-maturity securities 121 165

Recovery of accrued interest (984) (1,684)

Provision (benefit) for credit losses $ (611) $ 13,385

1 2021 includes $1.5 million as part of the First Choice acquired commitments.

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date.

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CECL requires economic forecasts to be factored into determining estimated losses.

As a result, CECL will typically require a higher level of provision at the start of an economic downturn.

The decrease in the provision for credit losses in 2021 was primarily due to a change in economic forecasts, which has significantly improved since the start of the COVID-19 pandemic in March 2020.

As a result, CECL is designed to typically require a higher level of provision at the start of an economic downturn.

The decrease in the provision for credit losses in 2022 was primarily due to the provision on acquired loans from the First Choice acquisition recognized in 2021, partially offset by a change in economic forecasts that worsened in 2022 and an increase in unfunded commitments.

Two of the primary economic loss drivers used in estimating the ACL include the percentage change in GDP and unemployment.

At December 31, 2021, the Company’s forecast of the percentage change in GDP included a range of (2.2)% to 6.7% and the percentage change in unemployment included a range of 3.0% to 8.7%.

At the beginning of the pandemic at March 2020, the forecast of the percentage change in GDP included a range of (9.6)% to 2.1% and the percentage change in unemployment included a range of 6.0% to 13.0%.

At December 31, 2022, the Company’s forecast of the percentage change in GDP included a range of (2.3)% to 3.5% and unemployment included a range of 3.5% to 7.7%.

This compares to a range of (2.2)% to 6.7% for the percentage change in GDP and a range of 3.0% to 8.7% for unemployment in 2021.

The Company utilizes a one-year reasonable and supportable forecast and a one-year reversion period.

In the acquisition of First Choice, we recognized an allowance of $7.6 million on PCD loans and an allowance of $23.9 million on non-PCD loans.

Similarly, in the acquisition of Seacoast we recognized an allowance of $3.5 million on PCD loans and $8.6 million on non-PCD loans.

In the acquisition of First Choice in 2021, we recognized an allowance of $7.6 million on PCD loans and an allowance of $23.9 million on non-PCD loans.

Pursuant to the CECL accounting methodology, the allowance on PCD loans is recorded as part of the acquired loan portfolio.

The allowance on non-PCD loans is established through a charge to the provision for credit losses in the post-combination financial statements.

The allowance on non-PCD loans was established through a charge to the provision for credit losses in the post-combination financial statements.

The Company did not recognize an acquisition related provision for credit losses in 2022.

To the extent the Company does not recognize charge-offs and economic forecasts improve in future periods, the Company could recognize a reversal of provision for credit losses.

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The provision is also reflective of charge-offs in the period.

The following table presents the components of the provision for credit losses for the periods indicated:

(in thousands) 2021 2020

Provision (benefit) for loan losses $ (10,911) $ 54,822

Provision on acquired loans 23,904 8,557

Provision for off-balance sheet commitments 1

Provision for held-to-maturity securities 165 147

Recovery of accrued interest (1,684) (1,005)

Provision for credit losses $ 13,385 $ 65,398

1 2021 includes $1.5 million as part of the First Choice acquired commitments.

The following table is a summary of the allocation of the allowance for credit losses for the periods indicated:

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The allowance for credit losses was 1.41% of total loans at December 31, 2022, compared to 1.61%, and 1.89%, at December 31, 2021 and 2020, respectively.

The decline in the allowance to total loans ratio in 2021 was primarily due to the comparatively lower ACL on the First Choice loan portfolio, net loan charge-offs of $11.6 million, improved credit metrics, and continued improvement in economic forecasts.

The increase in the ratio in 2020 compared to 2019 was due to the adoption of CECL and higher provision expense due to the pandemic, partially offset by the acquisition of Seacoast and PPP loans which included $1.3 billion in government-guaranteed loans with no allowance.

The decline in the allowance to total loans ratio in 2022 compared to 2021 was primarily due to an improvement in credit quality, a shift in the mix of the loan portfolio to categories with lower reserve requirements, and net loan charge-offs of $3.9 million.

The following table is a summary of net charge-offs (recoveries) to average loans for the periods indicated:

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Nonperforming loans and assets

Note 1 – Summary of Significant Accounting Policies” for more information on impaired loans and other real estate.

Note 1 – Summary of Significant Accounting Policies” for more information on nonaccrual loans and other real estate.

The following table presents the categories of nonperforming assets, excluding government guaranteed portions:

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Commercial real estate 4,200 42 % 10 4,414 16 % 14

Construction and land development 1,192 12 % 2 — — % —

Residential real estate 73 1 % 1 2,048 7 % 12

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The decrease in nonperforming loans during 2022 was primarily from principal payments of $17.6 million and charge-offs of $9.4 million.

The Company implemented several loan programs to assist its customers impacted by the COVID-19 pandemic, including providing short-term payment deferrals, primarily for 90 days or less.

As of December 31, 2021, substantially all of these loans have returned to a paying status.

The charge-offs off nonperforming loans were primarily in C&I and residential real estate, representing 65% and and 22% of gross charge-offs in 2022, respectively.

Other real estate

Other real estate at December 31, 2021 and December 31, 2020 was $3.5 million and $5.3 million, respectively.

The following table summarizes the changes in other real estate:

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Other real estate, end of period $ 269 $ 3,493

Writedowns in fair value were recorded in loan, legal, and other real estate expense.

At December 31, 2021, our portfolio of investment securities was $1.8 billion, or 13%, of total assets, compared to $1.4 million, or 14%, of total assets as of December 31, 2020.

At December 31, 2022, our portfolio of investment securities was $2.2 billion, or 17%, of total assets, compared to $1.8 billion, or 13%, of total assets as of December 31, 2021.

The increase in 2022 was due to a reallocation of excess liquidity into the investment portfolio.

The portfolio is comprised of both available-for-sale and held-to-maturity securities.

The table below sets forth the carrying value of investment securities held by the Company:

The table below sets forth the carrying value of investment securities, excluding the allowance for credit losses:

($ in thousands) Amount % Amount %

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The Company had no debt securities classified as trading at December 31, 2022, or 2021.

The following table summarizes expected maturity and tax-equivalent yield information on the investment portfolio at December 31, 2021:

The following table summarizes contractual maturity and tax-equivalent yields on the investment portfolio at December 31, 2022:

Within 1 year 1 to 5 years 5 to 10 years Over 10 years Total

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Yields on tax-exempt securities are computed on a taxable equivalent basis using a tax rate of 25.2%.

Expected maturities will differ from contractual maturities, as borrowers may have the right to call or repay obligations with or without prepayment penalties.

Actual maturities can differ from contractual maturities, as borrowers may have the right to call or repay obligations with or without prepayment penalties.

Other investments primarily consist of the FHLB capital stock, common stock investments related to our trust preferred securities, community development funds, and other investments in private equity funds, primarily SBICs.

These investments do not have a stated maturity.

($ in thousands) Amount % Amount %

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Total $ 63,790 100.0 % $ 59,896 100.0 %

The following table summarizes expected maturity and tax-equivalent yield information on other investments at December 31, 2021:

No Stated Maturity

($ in thousands) Amount Yield

FHLB capital stock $ 12,075 4.13 %

Other investments 47,821 1.78 %

Total $ 59,896 2.25 %

The following table shows the breakdown of the Company’s deposits by type:

The following table shows the breakdown of deposits by type:

Years ended December 31, % Increase (decrease)

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Noninterest-bearing deposits / Total deposits 43 % 40 %

The following table shows the average balance and average rate of the Company’s deposits by type:

The following table shows the average balance and average rate of deposits by type:

Years ended December 31,

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Average total deposits were $11.3 billion for the year ended December 31, 2022, an increase of $1.7 billion, or 18%, from December 31, 2021.

The increase in 2022 was primarily due to a full year of balances from the First Choice acquisition and organic growth.

The increase in 2021 was primarily due to the First Choice and Seacoast acquisitions and the high level of liquidity in the economy.

The increase in 2020 was primarily due to the Seacoast acquisition and PPP loan fundings.

The following table sets forth the maturities of estimated uninsured certificates of deposit as of December 31, 2022.

Uninsured deposits are amounts estimated to exceed the FDIC deposit insurance limit and are not subject to any federal or state insurance program.

($ in thousands) Total

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As of December 31, 2022, estimated uninsured deposits totaled $5.9 billion, including $124.6 million of certificates of deposit.

At December 31, 2020, estimated uninsured deposits totaled $3.3 billion.

Also, at December 31, 2021 estimated uninsured deposits totaled $5.9 billion.

Shareholders’ equity

Shareholders’ equity totaled $1.5 billion at December 31, 2021, an increase of $450.1 million, or 42%, from December 31, 2020.

Shareholders’ equity totaled $1.5 billion at December 31, 2022, a decrease of $6.9 million, or 0.4%, from December 31, 2021.

Significant activity during the year ended December 31, 2022 included the following:

• increase from the issuance of approximately 7.8 million shares of common stock for the First Choice acquisition reflecting $342.3 million of consideration;

• Increase from net income of $203.0 million;

• increase from issuance of preferred stock of $72.0 million, net;

• decrease from share repurchases of $60.6 million, pursuant to the Company’s publicly-announced stock repurchase program;

• decrease from dividends paid on common stock of $26.2 million;

• Net decrease in fair value of available-for-sale securities and cash flow hedges of $149.1 million;

• Decrease from dividends paid on common stock of $33.6 million and preferred stock of $4.0 million, respectively;

• Decrease from share repurchases of $32.9 million, pursuant to the Company’s publicly-announced stock repurchase program;

• Retirement of 1,980,093 of treasury stock shares.

Liquidity and Capital Resources

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Liquidity from assets is available primarily from cash balances and the investment portfolio.

Cash and interest-bearing deposits with other banks totaled $2.0 billion at December 31, 2021, compared to $537.7 million at December 31, 2020.

The low interest rate environment, coupled with an uncertain outlook and government stimulus, such as the PPP, has increased liquidity within the banking industry, including the Company.

Cash and interest-bearing deposits with other banks totaled $291.4 million at December 31, 2022, compared to $2.0 billion at

December 31, 2021.

The decline in cash balances during 2022 is due to loan growth and a deployment of liquidity into the investment portfolio, coupled with a decline in total deposits.

The increase in market interest rates in 2022 increased the competitive environment for deposits, as depositors have more alternatives to bank deposit accounts.

This reverses the trend from 2020-2021, when the low interest rate environment, coupled with an uncertain outlook and government stimulus, increased liquidity within the banking industry.

Investment securities are another important tool to the Company’s liquidity objectives.

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Liability liquidity funding sources are available to increase financial flexibility.

In addition to amounts borrowed at December 31, 2021, the Company could borrow an additional $709 million from the FHLB of Des Moines under blanket loan pledges and has additional real estate loans of approximately $970.0 million that could be pledged.

In addition to amounts borrowed at December 31, 2022, the Company could borrow an additional $752 million from the FHLB of Des Moines under blanket loan pledges and has additional real estate loans that could be pledged.

The Company also has $1.4 billion available from the Federal Reserve Bank under a pledged loan agreement.

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Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity.

The Company has $2.6 billion in unused commitments as of December 31, 2021.

The Company has $3.2 billion in unused commitments to extend credit as of December 31, 2022.

While this commitment level would exhaust the majority the Company’s current liquidity resources, the nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.

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The Company also enters into derivative contracts under which the Company either receives cash from or pays cash to counterparties depending on changes in interest rates.

Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date.

Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on

market interest rates as of the balance sheet date.

The fair value of these contracts changes daily as market interest rates change.

For additional information on the Company’s contractual obligations and commitments see the following footnotes in Item 8:

“Note 6 – Leases,” “Note 7 – Derivative Financial Instruments,” “Note 11 – Subordinated Debentures,” “Note 12 – Federal Home Loan Bank Advances,” “Note 13 – Other Borrowings,” and “Note 18 – Commitments.”

“Note 5 – Leases,” “Note 6 – Derivative Financial Instruments,” “Note 10 – Subordinated Debentures and Notes,” “Note 11 – Federal Home Loan Bank Advances,” “Note 12 – Other Borrowings,” and “Note 17 – Commitments.”

Capital Resources

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1 Not a required regulatory capital ratio

The Company believes the tangible common equity and regulatory capital ratios are important measures of capital strength even though they are considered to be non-GAAP measures.

The Company believes the tangible common equity and regulatory capital ratios are important measures of capital strength.

The tangible common equity to tangible assets ratio is considered a non-GAAP measure.

The tables included in this MD&A section under the caption “Use of Non-GAAP Financial Measures” reconcile these ratios to U.S.

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This difference represents the Company’s earnings sensitivity to a positive or negative parallel rate shock.

The following table summarizes the projected impact of interest rate shocks on net interest income at December 31, 2021:

The following table summarizes the projected impact of interest rate shocks on net interest income:

Annual % change

in net interest income

At December 31,

+ 300 bp 11.1% 22.9%

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+ 100 bp 3.8% 5.6%

1 Due to the current levels of interest rates, the downward shock scenarios are not shown.

- 100 bp (4.1)% NA

- 200 bp (9.0)% NA

- 300 bp (15.1)% NA

1 Due to the levels of interest rates in 2021, the downward shock scenarios are not shown.

In addition to the rate shocks shown in the table above, the Company models net interest income under various dynamic interest rate scenarios.

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They are used to modify the Company’s exposures to interest rate fluctuations and provide more stable spreads between loan yields and the rate on their funding sources.

At December 31, 2021, the Company had $62.0 million in derivative contracts used to manage interest rate risk.

Derivative financial instruments are also discussed in “Item 8.

At December 31, 2022, the Company had derivative contracts to manage interest rate risk, including $200.0 million in notional value on derivatives to hedge the cash flows on

floating rate loans and $62.0 million in notional value on derivatives on floating rate debt.

Derivative financial instruments are discussed in “Item 8.

Note 6 – Derivative Financial Instruments.”

The FCA has announced that the most common USD LIBOR settings (overnight, 1-month.

3-month, 6-month and 12-month) will cease publication after June 30, 2023.

LIBOR is the most liquid and common interest rate index in the world and is commonly referenced in financial instruments.

The Federal Reserve’s Alternative Reference Rates Committee has proposed that SOFR replace LIBOR.

The Company expects to select a replacement index and provide customer notification in early 2023, prior to the cessation of the USD LIBOR settings.

While a replacement index has not yet been selected, the Company ceased using LIBOR and ICE swap rates in new contracts and began issuing SOFR based loans in December 2021.

3-month, 6-month and 12-month) will cease publication after September 30, 2024.

LIBOR was the most liquid and common interest rate index in the world and was commonly referenced in financial instruments.

With the cessation of LIBOR, the Company has selected term SOFR as the replacement index for the majority of its variable rate loans and has begun providing customer notifications in early 2023.

The Company ceased using LIBOR and ICE swap rates in new contracts and began issuing SOFR based loans in December 2021.

We have exposure to LIBOR in various financial contracts.

Instruments that may be impacted include loans, securities, debt instruments and derivatives, among other financial contracts indexed to LIBOR and that mature after December 31, 2021.

Instruments that may be impacted include loans, debt instruments and derivatives, among other financial contracts indexed to LIBOR and that mature after December 31, 2022.

We also have loans that are indirectly linked to LIBOR through reference to the ICE swap rate.

We have an internal working group composed of members from legal, credit, finance, operations, risk and audit to monitor developments, develop policies and procedures, assess the impact to the Company, consider relevant options and to determine an appropriate replacement index for affected contracts that expire after the expected discontinuation of LIBOR on June 30, 2023.

We are actively working to amend and address impacted contracts to allow for a replacement index.

However, amending certain contracts indexed to LIBOR may require consent from the counterparties which could be difficult and costly to obtain in certain circumstances.

We have an internal working group composed of members from legal, credit, finance, operations, risk and audit to monitor developments, develop policies and procedures, assess the impact to the Company from the replacement index for affected contracts that expire after the expected discontinuation of representative LIBOR on June 30, 2023.

Amending certain contracts indexed to LIBOR may require consent from the counterparties which could be difficult and costly to obtain in certain circumstances.

As of December 31, 2022, the Company’s financial contracts indexed to LIBOR included $1.4 billion in loans (including $497.5 million indirectly linked to LIBOR through reference to an ICE swap rate), $74.8 million in borrowings, and $466.9 million (notional) in derivatives.

In addition, LIBOR is used in the Company’s analysis of the fair value of tax credits and may be referenced in other financial contracts not included in the discussion above.

The Company had $6.1 billion in variable rate loans as of December 31, 2022.

Of these loans, $3.2 billion have an interest rate floor and 95% of those loans were at the floor.

$2.8 billion in variable rate loans are indexed to LIBOR, $2.4 billion are indexed to the prime rate, and $382.8 million are indexed to other rates.

Of these loans, $3.7 billion have an interest rate floor and nearly all of those loans were at or above the floor.

$1.4 billion in variable rate loans are indexed to LIBOR, $2.9 billion are indexed to the prime rate, $1.4 billion are indexed to SOFR, and $413.4 million are indexed to other rates.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain.

Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience.

In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected.

The impact and any associated risks related to our critical accounting policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results.

Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on experience.

In the event different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected.

The impact and any associated risks related to our critical accounting policies on our business operations are described throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results.

For a detailed discussion on the application of these and other accounting policies, see “Item 8.

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Allowance for Credit Losses

On January 1, 2020, the Company adopted Accounting Standard Update 2016-13 “Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.” This standard, referred to as CECL, requires an estimate of lifetime expected credit losses on certain financial assets measured at amortized cost.

The Company maintains separate allowances for funded loans, unfunded loans, and held-to-maturity securities, collectively the ACL.

The ACL is a valuation account to adjust the cost basis to the amount expected to be collected, based on management’s estimate of experience, current conditions, and reasonable and supportable forecasts.

The Company maintains separate allowances for funded loans, unfunded loans, and held-to-maturity securities, collectively referred to the ACL.

The ACL is a valuation account to adjust the cost basis to the amount expected to

be collected, based on management’s experience, current conditions, and reasonable and supportable forecasts.

For purposes of determining the allowance for funded and unfunded loans, the portfolios are segregated into pools that share similar risk characteristics that are then further segregated by credit grades.

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The Company considers its core efficiency ratio, tangible common equity ratio, return on average tangible common equity, and tangible book value per common share, collectively “core performance measures,” presented in this report, as relevant measures of financial performance, even though they are non-GAAP measures, as they provide supplemental information by which to evaluate the impact of certain non-comparable items, and the Company’s operating performance on an ongoing basis.

Core performance measures exclude certain other income and expense items such as merger-related expenses, facilities charges, and the gain or loss on sale of investment securities, which

the Company believes to be not indicative of or useful to measure the Company’s operating performance on an ongoing basis.

Core performance measures exclude certain other income and expense items such as merger-related expenses, facilities charges, and the gain or loss on sale of investment securities, which the Company believes to be not indicative of or useful to measure the Company’s operating performance on an ongoing basis.

The attached tables contain a reconciliation of these core performance measures to the GAAP measures.

The Company believes that the tangible common equity ratio provides useful information to investors about the Company’s capital strength even though it is considered to be a non-GAAP financial measure and is not part of the regulatory capital requirements to which the Company is subject.

The Company believes the tangible common equity ratio provides useful information to investors about the Company’s capital strength even though it is considered to be a non-GAAP financial measure and is not part of the regulatory capital requirements to which the Company is subject.

The Company believes these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding the Company’s performance and capital strength.

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($ in thousands) 2022 2021 2020

Net interest income $ 360,194 $ 270,001 $ 238,717

Net interest income (GAAP) $ 473,903 $ 360,194 $ 270,001

Tax-equivalent adjustment 7,042 5,151 3,190

Less incremental accretion income — — 4,083

Core net interest income 360,194 265,918 233,934

Total noninterest income 67,743 54,503 49,176

Less gain on sale of other real estate 884 — —

Less other income from non-core acquired assets — — 1,372

Noninterest income (GAAP) 59,162 67,743 54,503

Less gain (loss) on sale of other real estate (93) 884 —

Less gain on sale of investment securities — — 421

Less other non-core income — — 265

Core noninterest income 66,859 53,817 47,295

Total core revenue $ 427,053 $ 319,735 $ 281,229

Total noninterest expense $ 245,919 $ 167,159 $ 165,485

Core revenue (non-GAAP) $ 540,200 $ 432,204 $ 322,925

Noninterest expense (GAAP) $ 274,216 $ 245,919 $ 167,159

Less amortization on intangibles 5,367 5,691 5,673

Less merger-related expenses — 22,082 4,174

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Less other non-core expenses — — 57

Core noninterest expense $ 220,396 $ 162,928 $ 147,259

Core efficiency ratio 51.61 % 50.96 % 52.36 %

Tangible Common Equity and Tangible Common Equity Ratio

For the Years ended December 31,

($ in thousands) 2021 2020 2019

Core noninterest expense (non-GAAP) $ 268,849 $ 214,705 $ 157,255

Core efficiency ratio (non-GAAP) 49.77 % 49.68 % 48.70 %

Tangible Common Equity, Tangible Book Value per Share, and Tangible Common Equity Ratio

Period ended December 31,

($ in thousands, except per share data) 2022 2021 2020

Total shareholders' equity $ 1,522,263 $ 1,529,116 $ 1,078,975

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Tangible common equity $ 1,068,192 $ 1,069,678 $ 795,324

Common shares outstanding 37,253 37,820 31,210

Tangible book value per share $ 28.67 $ 28.28 $ 25.48

Total assets $ 13,054,172 $ 13,537,358 $ 9,751,571

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Tangible common equity to tangible assets 8.43 % 8.13 % 8.40 %

Return on Average Tangible Common Equity

Return on Average Tangible Common Equity (ROATCE)

For the Years ended December 31,

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Average tangible common equity $ 1,042,091 $ 938,176 $ 662,119

Net Income $ 133,055 $ 74,384 $ 92,739

Net income available to common shareholders (GAAP) $ 199,002 $ 133,055 $ 74,384

Return on average tangible common equity 19.10 % 14.18 % 11.23 %

Tangible Book Value Per Common Share

For the Years ended December 31,

($ and shares in thousands) 2021 2020 2019

Tangible common equity (calculated above) $ 1,069,678 $ 795,324 $ 630,765

Period end shares outstanding 37,820 31,210 26,543

Tangible book value per common share $ 28.28 $ 25.48 $ 23.76

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis